FCCB proceeds cannot be treated as deemed income under Section 68 without proving subscribing entity details

The Bombay HC upheld the Tribunal's decision favoring the assessee regarding Section 68 addition on FCCB proceeds. The AO had treated FCCB proceeds as deemed income, claiming the assessee failed to provide details of actual bondholders and ultimate beneficiaries. Following the precedent in Reliance Communication case, the Tribunal held that the assessee only needed to prove identity, capacity, and creditworthiness of the subscribing entity, not the actual subscribers. The HC confirmed this position, noting the revenue's appeal in Reliance Communication was dismissed by HC and SLP was also rejected. The addition under Section 68 was deemed incorrect.

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Issues involved:
The issues involved in the judgment relate to the deletion of addition of FCCB proceeds under section 68 of the Income Tax Act, 1961. The key questions of law proposed include the justification for deleting the addition of FCCB proceeds, failure to establish identity creditworthiness and genuineness of bondholders, non-production of subscriber register, adverse inference under the Indian Evidence Act, relevance of lead managers and bondholders, and allowance of issue and interest expenses.

Summary:

Issue 1: Deletion of FCCB proceeds under section 68 of the Act
The respondent raised funds through FCCBs with Barclays Bank as the lead manager. The appellant received proceeds of FCCB and transferred them as per the demerger scheme. The Assessing Officer initially accepted the funds but later applied section 68 of the Act during reassessment. The CIT(A) allowed the appeal, and the ITAT upheld the decision, concluding that the nature and source of the FCCB funds were adequately explained.

Issue 2: Failure to establish identity creditworthiness and genuineness of bondholders
The appellant was required to provide details of actual bondholders, but the Tribunal held that the appellant had discharged its onus by proving the identity, capacity, and creditworthiness of the entity that subscribed to the FCCB issue. The Tribunal rejected the argument that the appellant needed to prove the identity of individual bondholders.

Issue 3: Non-production of subscriber register
The appellant was criticized for not producing the subscriber register maintained by the Registrar. However, the Tribunal found that the facts were similar to a previous case where the appellant had adequately explained the source of funds without the need to prove the identity of actual bondholders.

Issue 4: Adverse inference under the Indian Evidence Act
The AO invoked section 68 of the Act due to the lack of information about bondholders. However, the Tribunal held that the appellant had sufficiently explained the source of funds, and adverse inference was not warranted.

Issue 5: Relevance of lead managers and bondholders
The Tribunal determined that the lead managers and bondholders were not crucial for the purposes of section 68 of the Act. The focus was on proving the identity, capacity, and creditworthiness of the entity that subscribed to the FCCB issue.

Issue 6: Allowance of issue and interest expenses
The Tribunal allowed issue and interest expenses to the extent they were deployed for business purposes. The appellant's failure to establish the genuineness of FCCB funds did not warrant disallowing all expenses.

In conclusion, the Tribunal correctly found that the nature and source of FCCB funds were adequately explained, leading to the dismissal of the appeal.

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